As home insurance premiums skyrocket this year, many insurers are cutting back on what used to be standard coverage.
Damage from wind, hail and sinkholes has been stripped from many basic homeowner policies. Last month, Allstate reduced coverage for roof replacements for new customers in Kansas after doing the same in Oklahoma late last year. The North Carolina Farm Bureau plans to eliminate wind damage coverage for many homes in the state. It follows State Farm, which dropped wind and hail coverage in southern Louisiana last year. "They're just cutting back on the coverage that they offer and raising the premiums so consumers are between a rock and a hard place," says Linda Sherry, director of national priorities at Consumer Action, a consumer advocacy group.
Insurers say most cutbacks have occurred in coastal states where coverage has proven too costly and they need to lessen their exposure to risk. The companies now look more closely at areas where severe weather recently wreaked havoc, and change their coverage accordingly, says Robert Hartwig, president and economist at the Insurance Information Institute. Separately, when insurers don't get state approval to raise premiums on policyholders, some will decide it makes more sense to cover less or to exit that market entirely, he says. When they cut back, they'll often sell the coverage they eliminated as a supplement with a second premium.
To be sure, homeowners can switch insurers if their existing provider scales back on coverage too much. Hartwig says there are now more insurance policies for residents to choose from than before.
Still, weakening coverage comes at an already challenging time for homeowners. Insurance premiums are estimated to rise 5% this year to $1,004 on average, according to the Insurance Information Institute -- and in some cases, deductibles are rising too. In December, State Farm began informing policy holders in Texas with homes insured for at least $100,000 that their deductibles would move from a fixed dollar amount (starting at $500) to at least 1%. On a $300,000 policy, that means a homeowner would have to pay at least $3,000 out of pocket. Company spokesman Gary Stephenson says the intention is "to minimize small or frivolous claims that some [policyholders] might have a tendency to file."
Here are three types of coverage insurers are scaling back.
Some homeowners now receive less coverage for damages to infrastructure -- including home foundations, sewers and roofs -- under basic homeowner policies.
Allstate recently introduced a policy in Oklahoma and Kansas -- the only one it offers to new customers in those states -- that doesn't pay out the full cost of replacing all roofs that incur windstorm or hail damage. Kevin Smith, a company spokesman, says Allstate will determine which roofs won't qualify based in part on their age and condition. If Allstate declines to pay the full cost, it will pay the current value of that roof and the homeowner will have to pay the difference. The company says the homeowner's other option is to purchase so-called replacement cost coverage in addition to their basic policy.
Damage to other home infrastructure is also dwindling. In Texas, 67% of homeowner insurance policies provide less coverage for damage to foundations and slabs, according to the Texas Department of Insurance. In addition, 72% offer less coverage for water backups from sewers and drains and 87% have lessened coverage for leaks from plumbing, heating or air conditioning systems. Up until 2003 when the state legislature deregulated insurance policy forms, this coverage was included in standard homeowner policies, says Alex Winslow, executive director of Texas Watch, a nonprofit consumer advocacy group that's primarily focused on insurance. Hartwig says that homeowners in coastal areas are seeing the biggest changes.
A growing number of companies are dropping coverage for damage caused by strong wind or hurricanes. North Carolina Farm Bureau plans to eliminate wind damage coverage from 15,000 policies as they come up for renewal starting in June. A company representative was not available to comment. Last year, State Farm dropped wind and hail coverage on roughly 29,000 residential properties owned by small landlords in southern Louisiana. The move was part of the company's ongoing efforts to "balance the amount of risk on our books," says Gary Stephenson, State Farm spokesman for Louisiana.
In some cases, exterior features of the home that are prone to wind damage are losing coverage. Early this year, Florida state-run insurer Citizens Property Insurance Corp. began eliminating coverage for external structures, including screened porches, patios and gazebos. The company says it's focused on reducing its assessments on Florida policyholders following a hurricane. In Texas, fewer policies now cover damage caused to homes by falling tree limbs, according to Texas Watch.
In some instances wind coverage might not kick in at all, says Bob Hunter, director of insurance at the Consumer Federation of America. Many insurers have added so-called anti-concurrent causation clauses in policies that remove all coverage for wind damage if a non-covered event -- like a flood -- occurs around the same time, he says. So, if a hurricane rips apart a home but a storm then floods the property, the homeowner might not be covered at all. "When a hurricane comes through you have the flood [insurers] saying it's a wind problem and the wind side saying it was caused by a flood," says Sandra Hairell, manager for personal insurance lines at Dean & Draper Insurance Agency in Houston, Texas. Insurers say these clauses have been in effect for years but more homeowners noticed following recent catastrophic storms.
Sinkholes are land depressions, often caused by underground limestone, that weaken a home's stability. In Florida, they've been a growing problem for homeowners: Sinkhole claims filed with Florida's largest insurer, Citizens Property Insurance Corp, totaled roughly 4,440 in 2011, nearly triple the amount in 2007.
But state authorities allege some homeowners file sinkhole claims and use the insurance money for purposes other than home repairs. Last year, Florida enacted reforms that gave insurers leeway with how they provide sinkhole coverage. The reforms defined a sinkhole loss as "structural damage" rather than cosmetic damage and lessened the amount of time homeowners have to file a claim.
In May, Florida's state-run insurer, Citizens Property Insurance Corp will introduce a 10% deductible for sinkholes when the ground collapses and reduce personal liability coverage to $100,000 from $300,000. Last year, State Farm removed sinkhole coverage in 16 counties in central Florida that had the highest average sinkhole cost per policy and offered policyholders the option to buy it back. Michal Connolly, a company spokeswoman, says this move lets homeowners decide whether they want to continue paying for this coverage. The change didn't include a rate increase though it did coincide with State Farm insurance premiums rising 19% on average for some Florida homeowners at the time, she says.